Professor Mazzucato, a Professor of Economics, spouts bollocks about economics

But then her chair is at Sussex.

In order to boost share prices – and the stock-based pay of executives and other large shareholders – Fortune 500 companies have spent $3 trillion in the last decade on buying back their stock. Such value extraction has funnelled money away from areas that can increase long-term growth – for example research and staff development – to areas that only increase the inequality between the 1% (whose rewards are linked to stock price movements) and the 99% (whose rewards are linked to investments in the productive economy). Value extraction is rewarded over value creation.

Er, no. That\’s $3 trillion that has been returned to shareholders. They\’ve made one investment, which has obviously made a profit, now they get their profits back and possibly they go an make another investment. Possibly, even, in hte sort of new companies, new market entrants, that drive long term growth.

Value creation is about reinvesting profits into areas that create new goods and services, and allow existing goods to be produced with higher quality and lower cost. Investments in human capital, skills, infrastructure, and research and development create value.

Quite true: but there\’s absolutely bugger all in theory that states that the \”reinvestment\” has to be within the same corporate structure that generated the original profits.

Indeed, given that it is new companies that drive the long term, theory actually suggests that it is better for the money to be returned to investors and they do the new investing. Not the extant corporate management.

My annoyance is that I\’d rather expect a professor of economics to know that.

46 comments on “Professor Mazzucato, a Professor of Economics, spouts bollocks about economics

  1. There’s a perfectly reasonable argument to be had about whether share buybacks or increased dividends are a better way of returning cash to shareholders but otherwise Prof M’s article was fundamentally wrong.

    Depressing seeing the likes of Monbiot and Murphy all retweeting this article as a sound example of how to restructure capitalism.

  2. I was relieved to see from the mini-biog at the head of the Guardian article that she is not in fact a prof of economics but has a chair in pointless modern not remotely academic vacuity.

    She also looks like Sally Bercow’s big sister plus clothes and minus booze.

  3. Can I have a professorship too?

    Has she ever been near a company or ‘a corporate environment’?

    And:
    As a direct and indirect shareholder in companies I wish to continue to allocate my capital as I so desire and not have Mr. Murphy do it for me. And that is because it is MINE and not because he clearly has no idea.

  4. The very fact that an ‘academic’ would continue with the 1% bullshit (especially thinking that all of the 1% are fucking stock holders/traders(actually I bet she thinks they all work in ‘666DERIVATIVES666’)) is depressing.

    This meme has gone too far to be stopped, and there’s no one with a remotely high public profile who’s willing to challenge it. How come the sane people are so shit at public relations?

  5. Oxonymous – “The very fact that an ‘academic’ would continue with the 1% bullshit (especially thinking that all of the 1% are fucking stock holders/traders(actually I bet she thinks they all work in ’666DERIVATIVES666?)) is depressing.”

    She is a professor is she? What do professors get these days? Well Cambridge has a job going on jobs.ac.uk:

    The Professorship of Empirical Macroeconomics
    University of Cambridge
    Placed on: 04-01-2013 Salary: £65,435 to £132,860

    But then so does Sussex:

    Professor of Economics
    University of Sussex – Department of Economics
    Placed on: 02-01-2013 Salary: £54,826

    Professors have come down in the world – the 99th percentile of British workers is something on the order of 156,000 pounds. So if she was at Cambridge and was at the top of her profession and published half a dozen books, she might be within spitting distance of it.

    No wonder she is pissed. Because she ain’t at Cambridge.

  6. So share buybacks create pools of gold for rich people to swim in and are never reinvested.

    Their view of the rich comes straight from Scrooge McDuck.

  7. I think there are circumstances in which share buy backs boost share prices (or is that not a claim you disagree with?)

  8. >I was relieved to see from the mini-biog at the head of the Guardian article that she is not in fact a prof of economics but has a chair in pointless modern not remotely academic vacuity.

    Unfortunately she kind of *is* a Professor of Economics. Sure she’s named as a Professor of ‘Science and Technology’, which makes you think she’s just part of some postmodernist bullshit department, but this post is actually in the School of Business, Management and Economics at Sussex. Shame on them.

    She comes from the New School for Social Research, an overtly left-wing institution.

    >Time we defunded the fake universities.

    Sure, but there’s plenty of this sort of thing at private Universities.

  9. Luis:

    “I think there are circumstances in which share buy backs boost share prices (or is that not a claim you disagree with?)”

    Indeed. And it is one of the reasons why there is a debate about the best way of returning cash to shareholders. Share buybacks do tend to up share prices, to the benefit of option-holding CEOs, more than a one-off special dividend would do.

    However the impact is much the same for the shareholder. Buying back shares does involve buying shares off the likes of XYZ Pension Fund and XYZ Unit Trust which then allows them to fund further new equity acquistions.

  10. Share buyback are generally more tax efficient (cap gain tax) rather than dividends (income tax), hence them being used to return capital in preference to special dividends.

  11. >The Professorship of Empirical Macroeconomics
    University of Cambridge
    Placed on: 04-01-2013 Salary: £65,435 to £132,860

    That spread says “We don’t know what we’re looking for and how much it’s worth”

  12. The academic makes the presumption that the company doesn’t know what’s good for itself, and she does know.

    Twit.

  13. The point is that the academic feels that the practice is worthy of scrutiny as future profits are spread over fewer shares thus boosting them more quickly, and enriching the share holding CEO, instead of the company making use of this interest free money.

  14. Dividends reduce share prices (ex-dividend, which is what option holders care about). To first order, buybacks are neutral for share prices.

    For example, consider a company whose assets consist of $100 in cash. It has 100 shares, which trade at $1 each. If it pays out $50 in a special dividend, the share price will fall to 50c. If instead it spends $50 to buy back half the shares, the share price will remain at $1.

    Of course the real world is a bit more complicated than that. But buybacks are certainly not a sure way for a CEO to increase the value of his share options.

  15. “If instead it spends $50 to buy back half the shares, the share price will remain at $1.”

    I think you’ll find that if a company is in the market buying up half its share register you might find some upward pressure on the share price.

  16. Oxonymous asks: “How come the sane people are so shit at public relations?”

    Probably because they are telling the truth?

  17. ‘That spread says “We don’t know what we’re looking for and how much it’s worth”’: nah it says that we have an intricate method for working out the stipend of a professor so until we know who we’re going to elect to the chair we can’t say how much we’ll pay him. At least that’s my guess.

  18. “I think you’ll find that if a company is in the market buying up half its share register you might find some upward pressure on the share price.”

    Yes, but not all share buy-backs perform as expected. I’m sure there’s been a bit of research that shows the return to the shareholder is quite poor in general. It’s driven buy the US market, dividends end up taking quite a wack tax wise there.

    I much prefer a dividend myself, in Aussie they are more tax efficient with franking credits too.

  19. ‘there’s absolutely bugger all in theory that states that the “reinvestment” has to be within the same corporate structure that generated the original profits’

    hang though, doesntAstraZeneca say, have the infrastructure in place to develop new ‘value’? I would have thought that the large shareholder (funds managers?)- the main beneficiary of a buyback will only go and plonk their wedge into GSK or Merck, rather than start-ups. Just a thought

    Apparently Uni of Sussex is in the THE’s top 100. cant be that bad

  20. “Dinero // Jan 16, 2013 at 1:58 pm

    The point is that the academic feels that the practice is worthy of scrutiny as future profits are spread over fewer shares thus boosting them more quickly, and enriching the share holding CEO, instead of the company making use of this interest free money.”

    ==============================

    It’s none of the twit’s business what the company does with its money. “Worthy of scrutiny?” By whom ?!?!

    Today’s investment climate is very poor. Buying back stock is very likely the best thing to do with your money today. Surely the BEST thing to do for the companies in question, as that’s what THEY decided to do with THEIR money. Second guessing them is stupid.

  21. I think you’ll find that if a company is in the market buying up half its share register you might find some upward pressure on the share price.

    There’ll be upward pressure from buying, and downward pressure from the fact the company is spending its cash reserves. The effects cancel – a share is just a claim on assets, and after the buyback there are fewer shares but with a claim on reduced assets.

  22. >The Professorship of Empirical Macroeconomics
    University of Cambridge
    Placed on: 04-01-2013 Salary: £65,435 to £132,860

    That spread says “We don’t know what we’re looking for and how much it’s worth”

    I can’t speak for that university, but at the one I worked for the spread was for seniority-based pay rises. The spread defines the pay for the level you’re appointed to, and every year you go up a notch within that level.

  23. “hang though, doesntAstraZeneca say, have the infrastructure in place to develop new ‘value’? ”

    If that were universally true then we would have no new companies. Instead we do have new companies and old ones tend to go out of business every once in a while. The truth is that some companies sometimes have good investment opportunities where they can create value. These should then reinvest their cash (not profit). The ones that instead don’t have such investment opportunities are better off returning the cash to the shareholders. The point is that outside professors can’t know whether a company does or does not but there tends to be a bias from CEOs to grow companies (in absolute revenue and market cap terms, not in RoE terms) which would mean that they are unlikely to be too aggressive when it comes to share buy-backs or dividends.

    “I would have thought that the large shareholder (funds managers?)- the main beneficiary of a buyback will only go and plonk their wedge into GSK or Merck, rather than start-ups. Just a thought”

    Large funds owning assets in large mature companies will unlikely go and invest in new start-ups. That’s true, it’s something that is more often done by venture capitalists. They are however not the only beneficiaries. Other beneficiaries may well go and invest into start-ups. Also, large funds most of the time invest on the secondary market so do not invest into companies (except for when there are IPOs) but instead buy their shares from other owners.

  24. No, it’s more general than that. One of N shares represents a share of the company’s assets, both tangible and intangible, total X. So the fair value of a share is X/N. If you spend an amount Y buying back shares, you expect to buy N.Y/X shares. Now you have got total assets (X-Y), number of shares N(1-Y/X), which is the same as N((X-Y)/X). So the new share price is (X-Y)/(N((X-Y)/X)) = X/N. Which is the same share price as we started with.

    There are secondary effects here – leverage, and tax distortions, which make this result only approximate. But empirical research suggests it’s a fair approximation.

  25. Do you remember that photo of George on a train with a female companion? That was her! Gotta be! Where else would he get his wacky understanding of economics? I don’t recall it being a subject treated by ‘Dandy’ or ‘Beano’….

  26. “The spread defines the pay for the level you’re appointed to, and every year you go up a notch within that level.”

    That definitely *won’t* be the case with that large a spread. Not even Cambridge increases a Professor’s salary by 6-7k a year. It indicates what they’re prepared to pay, but what exactly the winning candidate would get depends on their rep, and who else is interested in them.

  27. Crikey. That article’s so wrong it’s embarrassing. Maybe I could blag my way into an academic post. I bet I could talk more convincing econobollocks than that.

    There are two reasons for share buybacks:

    1) for companies with large cash balances, because the company has more cash than it needs to fund the investments it wishes to make, foresees no further expansion opportunities to mop up the surplus cash, and cannot make any sort of decent return from sitting on the cash.

    2) for companies that don’t have high cash balances, because borrowing costs have fallen to the point where replacing equity with debt makes sense.

    Both of these are true at the moment. Both are a consequence of the poor state of the (world) economy. They are not good news.

    Oh, and Paul, you are right that there is no immediate effect on the share price, but as the effect of buybacks is to improve return on equity for the remaining shareholders, the share price does of course increase as a consequence of share buybacks. It’s the reverse of the effect of a rights issue.

  28. Further to Tank’s comment, professorial salaries in many institutions have historically been a matter of negotiation with the individual concerned. So the spread may simply indicate the scale across which the institution is willing to negotiate.

  29. professorial salaries have been a matter of negotiation so the spread may simply indicate the scale across which the institution is willing to negotiate

    If I work out a budget for my next car of say £20 -40,000 it would indicate that I was looking first at the amount of money available to spend before even considering my preferences and requirements from this outlay.

    Moreover, the car (or dealership) will not be aware of my budget and will not price accordingly. A candidare accepting a salary at the lower end of the scale is either still in shorts or suffers from self-loathing.

  30. -Paul B
    If there are less share holders and the same profits then remaining holders receive higher divedends, and own a larger proportion of the company.

  31. If returns on the share value of the core business are higher than returns on cash, then earnings per share will be higher. On average we expect that to be the case (in the real-world measure). But that doesn’t mean the share price should be higher, because the higher expected returns per share represent a risk premium (the same risk premium as was built into the market’s valuation of the risky part of the business before the buyback).

  32. Paul,

    If the buy-back is debt financed, you are correct that there should be no difference – although see my comment below about the tax shield on debt.
    However, if the buy-back is funded from cash balances (retained earnings), the company has reduced its equity without raising its risk – which, assuming it continues to be profitable, would raise its share price over time.

    Modigliani-Miller demonstrates that (ceteris paribus) there is no difference between equity and debt financing, not that diluting (or concentrating, in this case) shareholder capital makes no difference. However, as ceteris very definitely isn’t paribus when you take account of the preferential tax treatment of debt over equity, M-M doesn’t hold anyway. Optimal capital structure is for high gearing where there is preferential tax treatment of debt. That is one of the principal reasons why companies are taking on debt finance to buy back equity. The low borrowing costs coupled with the preferential tax treatment of debt make it worth their while.

  33. Paul

    further to my last….in a cash-financed buyback the overall size of the balance sheet has reduced, whereas in a debt-financed buyback the size of the balance sheet remains the same and all you have done is swapped equity for debt. Modigliani-Miller addresses the second of these. It doesn’t address the buyback case where the actual size of the balance sheet has changed. That is ceteris not being paribus.

  34. OK, I disagree that cash balances are different from debt, but I won’t pursue the argument here.

    I agree that the tax treatment favours debt financing. Perhaps Mariana Mazzucato would agree with me that we should eliminate this distortion, so as to reduce the amount of human ingenuity going into tinkering with capital structures.

  35. Pingback: Una recopilación de otras críticas a Mazzucato | Níntil

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